Insights

The impact of Brexit on Energy and Natural Resources

Posted on 9th August 2016 at 11:38 am

One of the fundamentals of UK energy policy is that it has to strike a balance between price, security and decarbonisation. Whatever happens next, the UK (and Scottish) governments will be driven by these key policy planks.

In the immediate aftermath of the referendum Andrea Leadsom, former Energy Minister, had sought to reassure the energy sector of a steady hand on the tiller, stating, “In my view, for energy policy I don’t believe anything will change.” The Energy Secretary at the time, Amber Rudd, expressed similar views.

Since then, while Secretary of State for Business, Energy and Industrial Strategy Greg Clark “gets climate change”, the fact that DECC has lost its cabinet nameplate suggests he may have other priorities.

Decarbonisation

On leaving the EU, the UK will no longer be bound by the Renewable Energy Directive, which creates legally binding targets for decarbonisation. This has the potential to significantly weaken this plank of the energy policy in favour of the other two.

The UK’s progress to date has been mixed, and recent policy has been described as “ever changing and incoherent”. The National Grid announced recently that the UK is almost certain to miss its 2020 targets (which require 15% of total energy to come from renewables). The Climate Change Committee’s recent report stated that the UK is currently in line with its goal of cutting emissions by 80% by 2050, but that new policies are needed to keep the UK on track.

Despite the demotion of DECC, there remains a widespread recognition of the need for decarbonisation, and historically it has been the UK who has driven the EU targets in this area. Some signs have been positive – following the Brexit vote the UK government announced its Fifth Carbon Budget, which now commits the UK to 57% emissions cuts by 2032.

Although the Paris Climate Treaty remains unratified by the UK, there are no expectations that it will remain so for long. The Paris Treaty will not be legally binding, but it would continue to create a strong incentive to meet decarbonisation targets similar to and possibly in excess of those the UK is currently committed to.

That means that the UK is likely to continue to pursue policies that meet those targets, but there could be a refocusing of incentives away from renewables and towards other low carbon technologies.

Security

Keeping the lights on is an essential task, and the closure of coal-fired generators by 2025 is the main policy concern. This closure is unlikely to be reversed, meaning that new base-load generation must be secured. Recent Capacity Market auctions have not produced any new gas generating stations although concerns are easing that Brexit might have affected the investment decision at Hinkley C.

Pressure for shale gas development across the UK will continue, and could add to efforts to remove EU environmental protections from UK law.

The various European energy interconnectors provide an essential backup for domestic generation during periods of high demand, as well as offering export opportunities at other times. EU funding for these is likely to continue, even post-Brexit.

Investors and developers hate uncertainty, and Brexit has created a lot of that. Confidence is fragile and investment is already at risk, with significant projects signalling potential delays or rethinks. Foreign owners and investors, which make up much of the renewable sector, will see concerns over trade barriers, tariffs, costs of diverging regulatory regimes and UK state aid favouring domestic industries and finance. This could result in reduced investment in new developments or even a two to three year pause in large-scale schemes.

On the other hand, approximately 70% of environmental regulation has an EU source, and if this “over-regulation” were to be removed, developments that were previously impossible could become viable. Furthermore, leaving the European Energy Market could have significant impacts on investment, jobs and consumer bills, so it is likely the UK’s ongoing participation in energy market harmonisation across Europe will continue. Finally, although the UK government may be tempted to relax state aid rules to benefit domestic businesses, it remains bound by the WTO subsidy regime and, if the UK wants access to the single market, it is unlikely to deviate from EU competition rules.

Price

Keeping energy bills low is a key objective of any UK government wanting to avoid a protest at the polls, and some Brexit scenarios are likely to put upward pressure on energy prices. Reduced foreign investment, new trade barriers and tariffs, diverging regulatory regimes, lack of access to the Internal Energy Market, loss of free movement of skilled workers, and loss of EU funding could all combine to increase the cost of energy in the UK at a time when wholesale prices are trending down.

Pushing in the other direction will be possible reductions in VAT, removal of EU tariffs on, for example, Chinese solar panels, reductions in environmental regulation reducing the cost and timescale of new developments and possible UK government State Aid.

Contact MacRoberts LLP for advice on Brexit

At MacRoberts, we have teams of experts ready to advise you on the potential legal implications of the UK’s exit from the EU. We can advise your business on the issues arising across the full range of sectors and legal disciplines.

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